Treasury Yields Rise Amid Fed's Interest Rate Outlook; BoE and BoJ Maintain Policies | Daily Market Analysis


 Key events:

  • USA - S&P Global Services PMI (Sep)                            

US stocks faced a decline, while Treasury yields rose following the Federal Reserve's indication of maintaining higher interest rates, including a potential increase later this year.

Interest rate-sensitive mega-cap stocks, notably (NASDAQ: AMZN), Nvidia Corp (NASDAQ: NVDA), Apple Inc (NASDAQ: AAPL), and Alphabet (NASDAQ: GOOGL) Inc, exerted downward pressure on the S&P 500 and Nasdaq, pushing them to their lowest closing levels since June.

The Dow Jones Industrial Average slipped by approximately 75 points (0.2%), the S&P 500 dipped by 0.9%, and the Nasdaq Composite, primarily comprising tech stocks, suffered a more significant setback, falling by 1.5%.

NASDAQ, SPX, and DJI indices daily chart

The Bank of England surprised by keeping interest rates unchanged, leading to a swift drop in the pound, which went below 1.2250 initially. The Bank's policy statement had a somewhat hawkish tone, and there was a division within the Monetary Policy Committee (MPC).

This implies that upcoming policy decisions might be closely contested, especially if inflation doesn't ease quickly. Consequently, it's reasonable to assume that the pound's downside potential may be limited in the near term. However, this may not hold true against the US dollar, given the Fed's hawkish stance, which is likely to provide support even during market dips.

GBP/USD daily chart

As a result, the GBP/USD currency pair could face further weakening, even if other pound crosses exhibit strength. Traders will closely monitor economic data, especially after hearing from both the Fed and the Bank of England, along with several other major central banks this week.

After the much-anticipated September policy review meeting, the Bank of Japan (BoJ) opted to maintain their existing monetary policy settings, keeping rates and the 10-year Japanese Government Bond (JGB) yield target unchanged at -10 basis points and 0.00%, respectively.

Following the BoJ's policy announcements, the USD/JPY currency pair's recovery gained momentum. It is currently trading at 148.06, marking a 0.34% increase for the day, with a momentary spike to 148.18 in an immediate response to the BoJ's decision.

USD/JPY daily chart

The Dollar Index (DXY), measuring the Greenback's strength against a basket of six major currencies, eased slightly, shifting from 105.55 to 105.40. US bond yields displayed mixed movements, with the 10-year rate climbing to 4.49%, while the 2-year yield decreased by 6 basis points to 5.14%.

US Dollar Currency Index daily chart

Meanwhile, the price of gold is benefiting from a broad retreat in the US Dollar, rebounding towards a critical resistance level. However, further recovery seems uncertain due to a renewed increase in US Treasury bond yields.

Later today, gold traders will be closely watching the release of business PMI data from the US, UK, and Euro area, seeking insights into the global economy's health as major economies teeter on the edge of recession. If discouraging PMI reports trigger risk aversion, the US Dollar may experience renewed safe-haven demand, potentially impeding the recovery in gold prices.

XAU/USD daily chart

End-of-week market dynamics will likely continue to influence US Dollar valuations, subsequently impacting gold price movements. Looking ahead to next week, economic data releases will include third-quarter gross domestic product estimates and the latest reading of the personal consumption expenditure index, which is the Federal Reserve's preferred inflation measure. These releases will be closely monitored by traders and investors.